Nargiza kasimova farkhod mukhamedov elkan harebov

 
2.5. How to Attract Foreign Investors 
 
Foreign investment is a type of outside financing to cover costs related to 
innovative activities. Discussing the issue of attracting foreign investment in a 
country, we must remember that there are no fundamental differences between 
external and internal funds. An investor is a supra-national, entirely economic 
concept. The basic laws of investment movement are universal  for all 
participants of the process, both residents and non-residents. Therefore, 
countries with an underdeveloped domestic investment market cannot count on 
additional funding from external sources. On the contrary, the developed 
countries, sensing some surplus  of capital in the national economy, are the 
largest recipients of foreign investment. 
Foreign investors invest their capital resources only in a stable, structured 
economy in which domestic investors trust by investing in local economy. As 
the global economic practice shows, in-country  sources of capital can be 
mobilized through a range of measures affecting  the rate of  consumption  and 
unemployment, taxes, and availability of domestic borrowing facilities. External 
financial sources can be foreign direct investment (FDI), reduction of consumer 
imports, or better international trade  conditions. The connection between all 
these sources can be expressed in the following equation (Meier, 1989): 
(𝑅𝑅 + 𝐺𝐺) − (𝑆𝑆 + 𝑇𝑇) = (𝑀𝑀 − 𝑋𝑋), 
where I is investment, T is taxes, G is government expenditure, M is imports, S 
is savings, and X is exports. 
This equation also expresses the connection between lack of developing 
economies’ resources and shortages of foreign currency. In a situation when a 
country with a developing economy spends on investment and state needs more 
than it receives from taxes and savings, a shortage of internal resources leads to 
a negative payment balance of the state. This follows from the analysis of the 
national income, stating that the use of the national income (𝐶𝐶 + 𝑅𝑅 + 𝐺𝐺 + 𝑋𝑋 −
𝑀𝑀, where C is consumption) equals total sources of its formation. The internal 
imbalance of resources results in the external imbalance of foreign currencies. 
Lack of resources is overcome by imports. A shortage of foreign currency, spent 
on imported goods and services,  is relieved by  flows of foreign capital  in the 
 
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host country. Thus, developing countries need currency to purchase foreign 
investment goods and services. In this case, the policy of developing the national 
economy through import substitution may have the major impact. 
Studies conducted in many countries (for example, Meier, 1989) describe 
advantages of boosting domestic production through export substitution (export 
of more processed forms of a good instead of only exporting the raw material) 
over import substitution (replacement of some agricultural or industrial imports 
to encourage local production for local consumption, with simultaneous 
introduction of protectionist measures). 
These advantages can be summarized as follows: 
- import substitution saves foreign currency, while export  substitution 
generates more currency 
- the domestic market of any product  is smaller than the world market, 
which  gives  economies of scale, opportunities for  advanced training  and  fair 
competition 
- export substitution  is a more  effective strategy  than  the  protectionist 
import substitution policy 
- internal resources are used more effectively  (no incentives to over-
consume resources) 
- the burden of external debt is eased, external debt service improves, and 
there are more opportunities for external borrowing 
In addition, import substitution tends to engage the country in creating low-
attractive sectors or industries where it has little chances to gain a competitive 
advantage.  Though  protectionism may guarantee that these  industries have 
access to domestic markets, domestic producers will not be able to rise to levels 
of international competitiveness. Some industries will be vulnerable to economic 
cycles and currency fluctuations. Some countries have already overcome the era 
of closed internal markets (e.g., the Soviet Union). As a result, when countries 
started trading outside their own national borders, imported goods of higher 
quality appeared on the domestic market. In such a situation, there are only two 
ways: either to close national borders, which will lead to economic (and hence 
political) isolation from the outside world with all its negative consequences, or 
to attempt to create an open consumer-oriented economy. 
Now  let us define the terms  ‘foreign  investment’  and  ‘foreign investors’ 
using the case of Russia. Foreign investment  is  understood as all types of 
tangible and intangible values invested by foreign investors in the domestic 
economy  in objects of  entrepreneurial and other activities because of higher 
expected rates of return. In Russia,  foreign investment can take the form of 
investment in: (1) newly created and modernized fixed assets and working 
capital in any  industry and sector  of the economy (2) securities (3)  specific 
money deposits (4) technological solutions  (5)  intellectual property (6) 
ownership rights. The legal regime for foreign investment and foreign investor 
 
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activities must be  just as favorable  as  the business regime for Russian  legal 
entities and individuals. Foreign investment is  not subject to nationalization, 
requisition,  or confiscation,  but for exceptional instances set forth by Russian 
legislation when  such measures are taken for the public benefit.  In cases of 
nationalization or requisition, foreign investors are paid out an adequate and 
sufficient compensation which should correspond to the real cost of nationalized 
or requisitioned investment. 
The following categories can be foreign investors: (1)  foreign legal 
entities, including  any company, firm, enterprise, organization  or association, 
and organizations that are not legal entities, established and authorized to make 
investment  in accordance with the legislation of the country of their location 
(2) foreign individuals, persons without citizenship permanently residing abroad 
(3) foreign states (4) international organizations. Foreign investors are entitled to 
make investment on the territory of the Russian Federation in the form of shared